The 'startup nation' is seeing less funding coming from local venture capital funds and more from their foreign counterparts. Meanwhile, communications and networking companies are raking in the investments.

The funding landscape in one of the biggest startup hotspots outside of Silicon Valley is shifting, with 2012 named as one of the worst years in the last decade for Israeli startups receiving local VC funding.

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According to research by PwC, the amount of investment from Israeli VC funds that went into high-tech startups in Israel during 2012 was the second lowest yearly figure since 2003. Only 2009 saw less VC funding awarded to new tech companies in the country, the report said.

Israel tech startups raised $867m in 2012, down from $1.2bn in 2011, although still above 2009's $735m.

Funding for high-tech companies in the last quarter of the year hit $277m, down 14 percent year-on-year. The figure was shared between 52 companies, making an average investment of $5.3m per startup – down from $5.6m a year ago.

However, that doesn't mean that the total amount of investment Israel's startups are getting is necessarily slipping – more that the way the companies are funded is changing. "Israeli VC funds, which used to dominate almost every significant transaction in Israel, have been recently losing ground to alternative investment entities such as private investment firms (mainly foreign), international VCs (with no representation in Israel), angels, micro-funds, etc," Rubi Suliman, partner at PwC Israel, said in a statement.

And, while local VC funds are actively looking for foreign investors to join them, an increasing number of non-Israel funds are making investments without any Israeli investors on board. "Given that this trend is poised to intensify, in conjunction with less money in local funds, it is small wonder then that VC-backed investments are in decline. The total investment in 2012 was 29-percent lower than 2011 and 28-percent lower than the average of $1.06bn in annual VC-backed investment over the last decade," Suliman added.

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The biggest sector for investment among high-tech startups in the country was communications and networking, which attracted $272m of investment in 2012, up from $256m the year before. Communications and networking has taken over as the largest area for VC funding from last year's biggest segment, internet companies, which attracted $179m in 2012 — down around one-third from 2011.

Other high-tech sectors saw a mixed bag of fortunes: investments in semiconductor companies almost halved, falling from $149m in 2011 to $80m in 2012, while software spending remained flat at $150m in 2012, compared to $153m in 2011.

Globally, software remained the largest slice of VC funding, according to figures published last month by PwC. The sector — which landed $8.3bn in investment, a 10-percent rise on 2011 levels — was only one of two to see a rise in investment year on year, along with retail.

Other tech sectors saw some of the biggest declines, with funding for electronics and instrumentation dropping 46 percent year-on-year and semiconductors dropping 32 percent.

Overall, VC funding globally fell 10 percent in 2012 to $26.5bn, while fourth-quarter investment dropped by three percent to $6.4bn.